msbi_Current_Folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

 

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from __________ to __________

 

Commission File Number 001-35272

 


 

MIDLAND STATES BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 


 

 

 

 

 

 

 

ILLINOIS

 

37-1233196

(State of other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

 

1201 Network Centre Drive

Effingham, IL

 

 

62401

(Address of principal executive offices)

 

(Zip Code)

 

(217) 342-7321

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes    No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

Non-accelerated filer

 

Smaller reporting company 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   No

 

As of July 29, 2016, the Registrant had 15,401,284 shares of outstanding common stock, $0.01 par value.

 

 


 

Table of Contents

 

Midland States Bancorp, Inc.

Table of Contents

 

 

 

 

 

Page

PART I.        FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2016 (Unaudited) and December 31, 2015

 

 

 

 

Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2016 and 2015

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2016 and 2015

 

 

 

 

Consolidated Statements of Shareholders’ Equity (Unaudited) for the six months ended June 30, 2016 and 2015

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2016 and 2015

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

43 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

67 

 

 

 

Item 4. 

Controls and Procedures

67 

 

 

 

PART II.      OTHER INFORMATION 

 

 

 

 

Item 1. 

Legal Proceedings

67 

 

 

 

Item 1A. 

Risk Factors

67 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

68 

 

 

 

Item 6. 

Exhibits

69 

 

 

 

SIGNATURES 

70 

 

 

 

 


 

Table of Contents

Part I – Financial Information

Item 1 – Financial Statements

Midland States Bancorp, Inc.

Consolidated Balance Sheets

(dollars expressed in thousands, except for per share data)

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

    

2016

    

2015

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

122,615

 

$

211,976

 

Federal funds sold

 

 

751

 

 

499

 

Cash and cash equivalents

 

 

123,366

 

 

212,475

 

Investment securities available for sale, at fair value ($74,130 and $75,979 covered by FDIC loss-share at June 30, 2016 and December 31, 2015, respectively)

 

 

238,781

 

 

236,627

 

Investment securities held to maturity, at amortized cost (fair value of $91,247 and $92,816 at June 30, 2016 and December 31, 2015, respectively)

 

 

84,756

 

 

87,521

 

Loans

 

 

2,161,041

 

 

1,995,589

 

Allowance for loan losses

 

 

(14,752)

 

 

(15,988)

 

Total loans, net

 

 

2,146,289

 

 

1,979,601

 

Loans held for sale, at fair value

 

 

101,782

 

 

54,413

 

Premises and equipment, net

 

 

72,147

 

 

73,133

 

Other real estate owned

 

 

3,540

 

 

5,472

 

Nonmarketable equity securities

 

 

17,385

 

 

15,472

 

Accrued interest receivable

 

 

8,360

 

 

7,697

 

Mortgage servicing rights, at lower of cost or market

 

 

62,808

 

 

66,651

 

Intangible assets

 

 

5,905

 

 

7,004

 

Goodwill

 

 

46,519

 

 

46,519

 

Cash surrender value of life insurance policies

 

 

73,665

 

 

52,729

 

Accrued income taxes receivable

 

 

3,546

 

 

8,754

 

Deferred tax assets, net

 

 

 —

 

 

1,496

 

Other assets

 

 

32,935

 

 

29,260

 

Total assets

 

$

3,021,784

 

$

2,884,824

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

528,966

 

$

543,401

 

Interest-bearing

 

 

1,825,586

 

 

1,824,247

 

Total deposits

 

 

2,354,552

 

 

2,367,648

 

Short-term borrowings

 

 

125,014

 

 

107,538

 

FHLB advances and other borrowings

 

 

97,588

 

 

40,178

 

Subordinated debt

 

 

54,459

 

 

61,859

 

Trust preferred debentures

 

 

37,229

 

 

37,057

 

Accrued interest payable

 

 

1,053

 

 

979

 

Deferred tax liabilities, net

 

 

1,633

 

 

 —

 

Other liabilities

 

 

33,941

 

 

36,509

 

Total liabilities

 

 

2,705,469

 

 

2,651,768

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value; 40,000,000 shares authorized; 15,402,946 and 11,797,404 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively

 

 

154

 

 

118

 

Capital surplus

 

 

208,092

 

 

135,822

 

Retained earnings

 

 

98,547

 

 

90,911

 

Accumulated other comprehensive income

 

 

9,475

 

 

6,029

 

Total Midland States Bancorp, Inc. shareholders’ equity

 

 

316,268

 

 

232,880

 

Noncontrolling interest in subsidiaries

 

 

47

 

 

176

 

Total shareholders’ equity

 

 

316,315

 

 

233,056

 

Total liabilities and shareholders’ equity

 

$

3,021,784

 

$

2,884,824

 

See accompanying notes to consolidated financial statements

1


 

Table of Contents

Midland States Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

(dollars expressed in thousands, except for per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

27,696

 

$

27,081

 

$

51,237

 

$

50,014

 

Tax exempt

 

 

322

 

 

322

 

 

645

 

 

543

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,884

 

 

2,752

 

 

5,786

 

 

5,804

 

Tax exempt

 

 

926

 

 

991

 

 

1,847

 

 

2,006

 

Federal funds sold and cash investments

 

 

287

 

 

96

 

 

567

 

 

180

 

Total interest income

 

 

32,115

 

 

31,242

 

 

60,082

 

 

58,547

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,290

 

 

1,754

 

 

4,512

 

 

3,399

 

Short-term borrowings

 

 

68

 

 

57

 

 

136

 

 

120

 

FHLB advances and other borrowings

 

 

256

 

 

232

 

 

392

 

 

523

 

Subordinated debt

 

 

1,054

 

 

436

 

 

2,112

 

 

617

 

Trust preferred debentures

 

 

458

 

 

446

 

 

901

 

 

870

 

Total interest expense

 

 

4,126

 

 

2,925

 

 

8,053

 

 

5,529

 

Net interest income

 

 

27,989

 

 

28,317

 

 

52,029

 

 

53,018

 

Provision for loan losses

 

 

629

 

 

2,379

 

 

1,754

 

 

3,376

 

Net interest income after provision for loan losses

 

 

27,360

 

 

25,938

 

 

50,275

 

 

49,642

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial FHA revenue

 

 

8,538

 

 

4,101

 

 

15,100

 

 

11,216

 

Residential mortgage banking revenue

 

 

1,045

 

 

4,832

 

 

2,166

 

 

10,815

 

Wealth management revenue

 

 

1,870

 

 

1,857

 

 

3,655

 

 

3,653

 

Merchant services revenue

 

 

436

 

 

372

 

 

860

 

 

677

 

Service charges on deposit accounts

 

 

965

 

 

950

 

 

1,872

 

 

1,968

 

Interchange revenue

 

 

945

 

 

863

 

 

1,909

 

 

1,809

 

FDIC loss-sharing expense

 

 

(1,608)

 

 

(204)

 

 

(1,661)

 

 

(297)

 

Gain on sales of investment securities, net

 

 

72

 

 

 —

 

 

276

 

 

159

 

Other-than-temporary impairment on investment securities

 

 

 —

 

 

 —

 

 

(824)

 

 

(162)

 

Gain on sales of other real estate owned

 

 

83

 

 

369

 

 

79

 

 

325

 

Other income

 

 

1,678

 

 

1,057

 

 

3,211

 

 

2,056

 

Total noninterest income

 

 

14,024

 

 

14,197

 

 

26,643

 

 

32,219

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

17,020

 

 

16,437

 

 

32,407

 

 

34,656

 

Occupancy and equipment

 

 

3,233

 

 

3,317

 

 

6,544

 

 

6,613

 

Data processing

 

 

2,624

 

 

2,626

 

 

5,244

 

 

5,110

 

FDIC insurance

 

 

498

 

 

551

 

 

962

 

 

1,143

 

Professional

 

 

1,573

 

 

2,183

 

 

3,274

 

 

4,533

 

Marketing

 

 

649

 

 

831

 

 

1,292

 

 

1,392

 

Communications

 

 

547

 

 

643

 

 

1,063

 

 

1,285

 

Loan expense

 

 

552

 

 

969

 

 

1,037

 

 

1,560

 

Other real estate owned

 

 

417

 

 

256

 

 

569

 

 

457

 

Amortization of intangible assets

 

 

519

 

 

602

 

 

1,099

 

 

1,265

 

Other

 

 

3,279

 

 

2,288

 

 

5,059

 

 

4,234

 

Total noninterest expense

 

 

30,911

 

 

30,703

 

 

58,550

 

 

62,248

 

Income before income taxes

 

 

10,473

 

 

9,432

 

 

18,368

 

 

19,613

 

Income taxes

 

 

3,683

 

 

2,762

 

 

6,460

 

 

6,353

 

Net income

 

 

6,790

 

 

6,670

 

 

11,908

 

 

13,260

 

Less: net income attributable to noncontrolling interest in subsidiaries

 

 

1

 

 

17

 

 

 —

 

 

76

 

Net income attributable to Midland States Bancorp, Inc.

 

$

6,789

 

$

6,653

 

$

11,908

 

$

13,184

 

Per common share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.51

 

$

0.56

 

$

0.94

 

$

1.10

 

Diluted earnings per common share

 

$

0.50

 

$

0.55

 

$

0.92

 

$

1.08

 

Weighted average common shares outstanding

 

 

13,358,289

 

 

11,899,919

 

 

12,657,552

 

 

11,893,069

 

Weighted average diluted common shares outstanding

 

 

13,635,074

 

 

12,098,476

 

 

12,936,995

 

 

12,090,474

 

See accompanying notes to consolidated financial statements

2


 

Table of Contents

 

Midland States Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

(dollars expressed in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net income

 

$

6,790

 

$

6,670

 

$

11,908

 

$

13,260

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) that occurred during the period

 

 

2,283

 

 

(3,329)

 

 

6,022

 

 

(1,914)

 

Reclassification adjustment for realized net gains on sales of investment securities included in net income

 

 

(72)

 

 

 —

 

 

(276)

 

 

(159)

 

Income tax effect

 

 

(890)

 

 

1,340

 

 

(2,313)

 

 

867

 

Change in investment securities available for sale, net of tax

 

 

1,321

 

 

(1,989)

 

 

3,433

 

 

(1,206)

 

Investment securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of unrealized gain on investment securities transferred from available-for-sale

 

 

(14)

 

 

(57)

 

 

(39)

 

 

(139)

 

Income tax effect

 

 

6

 

 

23

 

 

16

 

 

52

 

Change in investment securities held to maturity, net of tax

 

 

(8)

 

 

(34)

 

 

(23)

 

 

(87)

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swap

 

 

31

 

 

10

 

 

61

 

 

35

 

Income tax effect

 

 

(13)

 

 

(3)

 

 

(25)

 

 

(12)

 

Change in cash flow hedges, net of tax

 

 

18

 

 

7

 

 

36

 

 

23

 

Other comprehensive income (loss), net of tax

 

 

1,331

 

 

(2,016)

 

 

3,446

 

 

(1,270)

 

Total comprehensive income

 

 

8,121

 

 

4,654

 

 

15,354

 

 

11,990

 

Less: net income attributable to noncontrolling interest in subsidiaries

 

 

1

 

 

17

 

 

 —

 

 

76

 

Total comprehensive income attributable to Midland States Bancorp, Inc.

 

$

8,120

 

$

4,637

 

$

15,354

 

$

11,914

 

See accompanying notes to consolidated financial statements

3


 

Table of Contents

 

Midland States Bancorp, Inc.

Consolidated Statements of Shareholders’ Equity (Unaudited)

Six Months Ended June 30, 2016 and 2015

(dollars expressed in thousands, except for per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Accumulated

 

Midland States 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

Bancorp, Inc.’s 

 

Noncontrolling 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

Capital

 

Retained

 

comprehensive

 

Shareholders’ 

 

interests in 

 

 

 

 

 

 

 

 

 

 

 

 

stock

 

surplus

 

earnings

 

income

 

Equity

 

subsidiaries

 

Total

 

 

 

 

 

 

 

Balances, December 31, 2015

 

$

118

 

$

135,822

 

$

90,911

 

$

6,029

 

$

232,880

 

$

176

 

$

233,056

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

11,908

 

 

 —

 

 

11,908

 

 

 —

 

 

11,908

 

 

 

 

 

 

 

Cash distributions to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(129)

 

 

(129)

 

 

 

 

 

 

 

Compensation expense for stock option grants

 

 

 —

 

 

212

 

 

 —

 

 

 —

 

 

212

 

 

 —

 

 

212

 

 

 

 

 

 

 

Amortization of restricted stock awards

 

 

 —

 

 

251

 

 

 —

 

 

 —

 

 

251

 

 

 —

 

 

251

 

 

 

 

 

 

 

Common dividends declared ($0.36 per share)

 

 

 —

 

 

 —

 

 

(4,272)

 

 

 —

 

 

(4,272)

 

 

 —

 

 

(4,272)

 

 

 

 

 

 

 

Initial public offering of 3,590,065 shares of common stock, net of issuance costs

 

 

36

 

 

71,662

 

 

 —

 

 

 —

 

 

71,698

 

 

 

 

 

71,698

 

 

 

 

 

 

 

Issuance of common stock under employee benefit plans

 

 

 —

 

 

145

 

 

 —

 

 

 —

 

 

145

 

 

 —

 

 

145

 

 

 

 

 

 

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

3,446

 

 

3,446

 

 

 —

 

 

3,446

 

 

 

 

 

 

 

Balances, June 30, 2016

 

$

154

 

$

208,092

 

$

98,547

 

$

9,475

 

$

316,268

 

$

47

 

$

316,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2014

 

$

117

 

$

134,423

 

$

74,279

 

$

10,637

 

$

219,456

 

$

473

 

$

219,929

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

13,184

 

 

 —

 

 

13,184

 

 

76

 

 

13,260

 

 

 

 

 

 

 

Cash distributions to noncontrolling interests

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(345)

 

 

(345)

 

 

 

 

 

 

 

Compensation expense for stock option grants

 

 

 —

 

 

68

 

 

 —

 

 

 —

 

 

68

 

 

 —

 

 

68

 

 

 

 

 

 

 

Amortization of restricted stock awards

 

 

 —

 

 

338

 

 

 —

 

 

 —

 

 

338

 

 

 —

 

 

338

 

 

 

 

 

 

 

Common dividends declared ($0.32 per share)

 

 

 —

 

 

 —

 

 

(3,786)

 

 

 —

 

 

(3,786)

 

 

 —

 

 

(3,786)

 

 

 

 

 

 

 

Issuance of common stock under employee benefit plans

 

 

1

 

 

380

 

 

 —

 

 

 —

 

 

381

 

 

 —

 

 

381

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

(1,270)

 

 

(1,270)

 

 

 —

 

 

(1,270)

 

 

 

 

 

 

 

Balances, June 30, 2015

 

$

118

 

$

135,209

 

$

83,677

 

$

9,367

 

$

228,371

 

$

204

 

$

228,575

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

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Table of Contents

 

Midland States Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(dollars expressed in thousands)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

11,908

 

$

13,260

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Provision for loan losses

 

 

1,754

 

 

3,376

 

Depreciation on premises and equipment

 

 

2,542

 

 

2,500

 

Amortization of intangible assets

 

 

1,099

 

 

1,265

 

FDIC loss-sharing expense

 

 

1,661

 

 

297

 

Amortization of restricted stock awards

 

 

251

 

 

338

 

Compensation expense for stock option grants

 

 

212

 

 

68

 

Increase in cash surrender value of life insurance

 

 

(936)

 

 

(559)

 

Investment securities amortization, net

 

 

531

 

 

577

 

Other-than-temporary impairment on investment securities

 

 

824

 

 

162

 

Gain on sales of investment securities, net

 

 

(276)

 

 

(159)

 

Gain on sales of other real estate owned

 

 

(79)

 

 

(325)

 

Write-down of other real estate owned

 

 

215

 

 

49

 

Origination of loans held for sale

 

 

(492,995)

 

 

(507,657)

 

Proceeds from sales of loans held for sale

 

 

456,368

 

 

539,533

 

Gain on loans sold and held for sale

 

 

(20,294)

 

 

(19,992)

 

Amortization of mortgage servicing rights

 

 

2,733

 

 

2,514

 

Impairment (recapture) on mortgage servicing rights

 

 

5,020

 

 

(119)

 

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(663)

 

 

(62)

 

Accrued interest payable

 

 

74

 

 

(161)

 

Accrued income taxes receivable

 

 

5,208

 

 

1,439

 

Other assets

 

 

1,434

 

 

(4,485)

 

Other liabilities

 

 

(1,825)

 

 

(14,667)

 

Net cash (used in) provided by operating activities

 

 

(25,234)

 

 

17,192

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Purchases

 

 

(44,029)

 

 

(29,349)

 

Sales

 

 

30,326

 

 

57,950

 

Maturities and payments

 

 

16,409

 

 

15,298

 

Investment securities held to maturity:

 

 

 

 

 

 

 

Purchases

 

 

(2,190)

 

 

(402)

 

Maturities

 

 

4,723

 

 

7,160

 

Net increase in loans

 

 

(170,595)

 

 

(112,079)

 

Purchases of premises and equipment

 

 

(1,556)

 

 

(3,498)

 

Purchase of bank-owned life insurance

 

 

(20,000)

 

 

(20,000)

 

Purchases of nonmarketable equity securities

 

 

(2,003)

 

 

(4,411)

 

Sales of nonmarketable equity securities

 

 

90

 

 

1,918

 

Proceeds from sales of other real estate owned

 

 

3,628

 

 

3,114

 

Net cash paid in acquisitions

 

 

 —

 

 

(20,053)

 

Net cash used in investing activities

 

 

(185,197)

 

 

(104,352)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net (decrease) increase in deposits

 

 

(13,096)

 

 

85,277

 

Net increase (decrease) in short-term borrowings

 

 

17,476

 

 

(12,400)

 

Proceeds from FHLB borrowings

 

 

495,000

 

 

47,500

 

Payments made on FHLB borrowings

 

 

(437,500)

 

 

(57,500)

 

Payments made on other borrowings

 

 

 —

 

 

(14,085)

 

Proceeds from issuance of subordinated debt, net of issuance costs

 

 

 —

 

 

54,445

 

Payments made on subordinated debt

 

 

(8,000)

 

 

 —

 

Cash dividends paid on common stock

 

 

(4,272)

 

 

(3,786)

 

Proceeds from issuance of common stock in initial public offering, net of issuance costs

 

 

71,698

 

 

 —

 

Proceeds from issuance of common stock under employee benefit plans

 

 

145

 

 

381

 

Cash distributions to noncontrolling interests

 

 

(129)

 

 

(345)

 

Net cash provided by financing activities

 

 

121,322

 

 

99,487

 

Net (decrease) increase in cash and cash equivalents

 

 

(89,109)

 

 

12,327

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of year

 

$

212,475

 

$

159,903

 

End of year

 

$

123,366

 

$

172,230

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

Interest paid on deposits and borrowed funds

 

$

7,979

 

$

5,690

 

Income tax paid

 

 

157

 

 

4,673

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

Transfer of loans to other real estate owned

 

$

2,153

 

$

681

 

See accompanying notes to consolidated financial statements

 

 

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Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

Note 1 – Business Description

Midland States Bancorp, Inc. (“the Company”, “we”, “our”, or “us”) is a diversified financial holding company headquartered in Effingham, Illinois. Our 135-year old banking subsidiary, Midland States Bank (the “Bank”), has branches across Illinois and in Missouri and Colorado, and provides traditional community banking and other complementary financial services, including lending, residential mortgage origination, wealth management, merchant services and prime consumer lending. We also originate and service government sponsored mortgages for multifamily and healthcare facilities and operate a commercial equipment leasing business on a nationwide basis.

Since late 2007, we have grown organically and through a series of nine acquisitions. Most recently, we acquired Love Savings Holding Company (“LSHC”) in December 2014, which greatly expanded our commercial and retail banking services in the St. Louis metropolitan area, added a branch and three mortgage offices in Colorado, and provided us the opportunity to enter complementary lending and leasing business lines.

Our principal business activity has been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We have derived income principally from interest charged on loans and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as: fees received in connection with various lending and deposit services; wealth management services; residential mortgage loan originations, sales and servicing; merchant services; and, from time to time, gains on sales of assets. With the acquisition of LSHC, we have expanded our income sources to include a greater emphasis on residential mortgage loan origination and servicing, Love Funding Corporation’s (“Love Funding”) commercial Federal Housing Administration (“FHA”) loan origination and servicing, and Heartland Business Credit Corporation’s (“Business Credit”) interest income on indirect financing leases. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for loan losses and income tax expense.

Initial Public Offering

On May 24, 2016, we completed our initial public offering and received gross proceeds of $67.0 million for the 3,044,252 shares of common stock sold by us in the offering. On June 6, 2016, we received additional gross proceeds of $12.0 million for the 545,813 shares of common stock sold when the underwriters for the initial public offering fully exercised their option to purchase additional shares of common stock. After deducting underwriting discounts and offering expenses, we received total net proceeds of $71.7 million from the initial public offering.

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation    

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These interim financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto as of and for the years ended December 31, 2015, 2014 and 2013, included in our registration statement on Form S-1 filed with the Securities and Exchange Commission (“SEC”).

Principles of Consolidation 

The consolidated financial statements include the accounts of the parent company and its subsidiaries, giving effect to the noncontrolling interest in subsidiaries, as more fully described below. All significant intercompany accounts and transactions have been eliminated. Assets held for customers in a fiduciary or agency capacity, other than trust cash on deposit with the Bank, are not assets of the Company and, accordingly, are not included in the accompanying unaudited consolidated financial statements.

The Company operates through its wholly owned subsidiary bank, Midland States Bank, headquartered in Effingham, Illinois. The Bank operates through its branch banking offices and subsidiaries: Love Funding, Business Credit, and Heartland Premier LLC (“Premier”). All of the subsidiaries are wholly owned as of June 30, 2016, except for Premier, which was formed as a joint venture mortgage origination operation, of which the Bank owns 51% and acts as a manager. Heartland Preferred Mortgage Company LLC (“Preferred”), formerly a subsidiary of the Bank, was a joint venture mortgage origination operation, of which the Bank owned 51% and acted as a manager. Preferred was dissolved

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Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

on May 27, 2016.  Premier and Preferred are included in the consolidated financial statements and the noncontrolling ownership interest is reported as a component of shareholders’ equity in the consolidated balance sheets as “noncontrolling interest in subsidiaries” and the earnings or loss attributable to the noncontrolling ownership interest is reported as “net income attributable to noncontrolling interest in subsidiaries” in the consolidated statements of income.

Use of Estimates 

In preparing the consolidated financial statements, we are required to make estimates and assumptions, which significantly affect the amounts reported in the consolidated financial statements. Significant estimates that are particularly susceptible to change include the fair value of investment securities, the determination of the allowance for loan losses, estimated fair values of purchased loans, valuation of real estate and other properties acquired in connection with foreclosures or in satisfaction of amounts due from borrowers on loans, and the carrying value of mortgage servicing rights. While Company management uses its best judgment, actual results may differ from those estimates. Current economic and market conditions significantly affect the judgments.

Summary of Significant Accounting Policies

The accompanying consolidated financial statements were compiled in accordance with the accounting policies set forth in Note 1 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in our consolidated financial statements as of and for the periods ended December 31, 2015, 2014 and 2013, included in our registration statement on Form S-1 field with the SEC. The accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments that, in the opinion of management, are necessary to reflect a fair statement of our consolidated financial condition, results of operations and cash flows. The results of operations for acquired companies are included from the dates of acquisition. Management has evaluated subsequent events for potential recognition or disclosure. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

Impact of New Financial Accounting Standards

FASB ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” – In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The ASU supersedes revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance in the FASB Accounting Standards Codification (“ASC”). The ASU requires an entity to recognize revenue that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration the entity expects to receive in exchange for those goods or services. The ASU identifies specific steps that entities should apply to achieve this principle. The new guidance was originally effective for fiscal years (including interim periods within those fiscal years) beginning after December 15, 2016 for public companies. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of this guidance to annual reporting periods beginning after December 15, 2017 for public companies, and permits early adoption on a limited basis. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09.

FASB ASU 2016-02, “Leases (Topic 842)” - In February 2016, the FASB issued ASU No. 2016-02, “Leases  (Topic 842).” This update revises the model to assess how a lease should be classified and provides guidance for lessees and lessors, when presenting right-of-use assets and lease liabilities on the balance sheet. The update is effective for the Company for the year ending December 31, 2019, although the Company may elect to adopt guidance earlier. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.

FASB ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” – In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. The ASU requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity

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Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

controls the good or the service before it is transferred to the customer. Topic 606 includes indicators to assist in this evaluation. The amendments in this update affect the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.

FASB ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” - In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This update includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, earnings per share, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early application is permitted for any organization in any interim period or fiscal year. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.

FASB ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” –  In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” The amendments clarify the following two aspects of Topic 606: identifying performance obligations, and the licensing implementation guidance. Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. The amendments in this update are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services. To identify performance obligations in a contract, an entity evaluates whether promised goods and services are distinct. Topic 606 includes two criteria for assessing whether promises to transfer goods or services are distinct. One of those criteria is that the promises are separately identifiable. This update will improve the guidance on assessing that criterion. Topic 606 also includes implementation guidance on determining whether as entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property, which is satisfied at a point in time, or a right to access the entity’s intellectual property, which is satisfied over time. The amendments in this update are intended to improve the operability and understandability of the licensing implementation guidance. The amendments in this update affect the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.

FASB ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” – In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The objective of this update to is improve financial reporting by providing timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better understand their credit loss estimates. For public companies that are SEC filers, this update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application is permitted for any organization for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.

Note 3 – Acquisitions

On December 31, 2014, the Company completed its acquisition of LSHC. At closing, LSHC primarily consisted of Heartland Bank, its wholly owned subsidiaries Love Funding and Business Credit, and $40.0 million of trust preferred debentures. Heartland Bank provided commercial and retail banking services in the St. Louis metropolitan area, its primary market, through the operation of 10 full-service banking offices, a full-service cyber office, three limited service loan production offices, and a retirement center office in Missouri, and one branch office in Colorado.  Love Funding is an approved FHA insured lender and Government National Mortgage Association issuer engaged in

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Table of Contents

Midland States Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

 

commercial mortgage origination and servicing, and Business Credit provides custom leasing and financing programs to equipment and software vendors. 

The Company acquired LSHC for $67.3 million, which consisted of 2,224,091 shares of common stock, $20.1 million in cash and an accrual in other liabilities of $530,000 for the fair value of additional consideration based on the earnings of Love Funding over a two year period after acquisition date. The additional consideration is defined as the amount, if any, by which 50% of Love Funding’s adjusted net income (for the two year period ending December 31, 2016) exceeds $9.1 million, multiplied by an earn-out multiple.  The contingent consideration amount is capped at $12.0 million and any payment will be made through issuance of the Company’s common stock.

The acquired identifiable assets included the establishment of a $3.4 million core deposit intangible, which is being amortized on an accelerated basis over 10 years.  The Company also recognized $0.5 million for the fair value of noncontrolling interests associated with two mortgage origination joint ventures owned 51% by Heartland Bank.

Pending Acquisition at June 30, 2016

On February 23, 2016, the Bank and Sterling National Bank of Yonkers, New York (“Sterling”) entered into a Trust Company Agreement and Plan of Merger (“Merger Agreement”), pursuant to which the Bank will acquire approximately $400.0 million in wealth management assets from Sterling. Under the terms of the Merger Agreement, the Bank will pay Sterling approximately $4.8 million in cash, with an expected closing date in the third quarter of 2016.  The transaction is subject to regulatory approval and other customary closing conditions.

Note 4 – Investment Securities Available for Sale

Investment securities classified as available for sale as of June 30, 2016 and December 31, 2015 are as follows (in thousands):